Any hike in global interest rates to impact India, other EMs: Rakesh Tarway

Interview with Head of Research at Reliance Securities

The benchmark indices have potential to gain over 4-5% by the year-end, tells RAKESH TARWAY, Head of Research, Reliance Securities in an interview with Aprajita Sharma. However, any let-up in earnings, rate hike by US Federal Reserve and continued stand-off with China pose a threat to markets, he adds. Edited excerpts:

Nifty has hit 10,000-mark. If an investor wants to make a fresh bet, do you think this market still holds low-hanging fruits?

We have been following a bottom-up strategy since long before Nifty added fifth digit. We have advised our clients to be stock-specific. Most of the market constituents seem to have discounted all positives of the next 12-18 months barring select stocks in pharma, IT and infra-related companies. Earnings growth is key to sustain market levels now. Any let-up in earnings will lead to correction in that specific stock. Similarly, any let-up in overall corporate earnings will lead to correction in entire equity market as well.

What are the visible domestic and global risks that may trigger correction in the market going ahead?

Reported earnings by companies so far for Q1FY18 have improved by nearly 10%, which is certainly lower than anticipated in the beginning of year. However, we should not forget that back to back unanticipated events in domestic economy namely demonetisation and GST roll-out have taken some toll on earnings, which may last for a quarter or two. Though easy global liquidity and a surge in domestic retail liquidity have been driving markets, market cannot downplay earnings recovery for long. We are of the view if corporate earnings do not improve to the level of over 15% in H2FY18 (though we are positive about earnings recovery), market may witness a meaningful correction. Apart from earnings, no major risks are visible as of now. Markets have already discounted the probable rate hikes by US Fed. Further, continued stand-off between India and China may also pose a risk to market.

What levels do you foresee on Nifty by end of calendar year 2017?

As per our internal calculations we still believe that market may potentially see an upside of 4-5% by the year-end. A possibility of rate cut in August 2 RBI policy, likely change in political shift after the inclusion of JDU in NDA and favourable monsoon may drive the market in the near-term.

The midcap and smallcap indices are trading at all-time high valuations? Do you think the rally in this space still has legs?

Valuation across market constituents stands at elevated levels and has discounted visible earnings for the medium-term. Therefore, searching for value-buys in mid and small caps at this time will require a lot of effort with substantial risks. We are of the opinion that select names in pharma, IT and infra companies have some risk-reward left for medium term investors.

What are your takeaways from the earnings season so far? What are your earnings estimates for Nifty for FY18 and FY19?

Till date reported numbers for Q1FY18 by 236 BSE-listed companies have witnessed an average earnings growth of nearly 10%, which we find is good considering the event of GST roll-out. We estimate an earnings growth of 15% for FY18 and 15-20% for FY19E.

Name a few sectors where one can still find margin of safety? Any turnaround story emerging?

As told earlier, select names in pharma, IT, infra companies have some risk-reward left for medium-term investors.

The US Fed looks set to reduce its massive balance sheet. Will it be a major worry for India?

Though it is difficult to quantify as of now, it will certainly hamper Indian markets with the shrinkage of easy money. A reduction of assets of Fed may result in falling prices and hence pushing treasury yield higher. Any increase in global interest rates will be detrimental for equity markets across emerging markets including India.